With a slew of neighborhood centers already suffering from dark grocery store anchors, Winn-Dixie Stores Inc.'s decision in June to pull out of 14 markets and close 326 stores was another piece of unwelcome news for many landlords.
“We are seeing more and more grocery stores go under,” says Charles Carlise, president of DeRito Partners Inc., a Phoenix-based retail brokerage firm. Usually, the villain in these stories is Wal-Mart, though Winn Dixie's problems extend way beyond the category killer.
That's why some landlords, including Equity One, prepared for the anticipated closings by unloading centers with poor performing stores. The healthier centers are confident they will sign on better-paying tenants for the space. The less-healthy centers, generally owned by smaller developers, face more of a problem. (See story on page 41.)
For them, replacing a shuttered grocery store while keeping the remaining tenants happy, is no small feat. “When you lose your grocery anchors, you go to second-tier anchors like Big Lots,” says Joseph French, a senior advisor with Sperry Van Ness in White Plains, N.Y. “If you're not successful with that, then you think about cutting up the space or putting in a non-retail use.”
The reality of replacing an anchor is less about preference and more about taking what you can get. “It's a struggle for the landlords because there aren't that many tenants that can stand alone,” says Kristen Barker, vice president of leasing for Houston-based AmREIT. “Owners are having to get creative and come up with non-traditional tenants. There's a short list of people you call, and it's not so easy to lease it up. It takes a long time.”
The short list for replacement anchors is indeed short — only a few retailers are willing and eager to go into a neighborhood center. Bargain stores such as Dollar General and discount stores like Big Lots are common replacements, but some traditional power-center retailers such as Michael's and Staples have been known to take on grocery store space.
Beyond retail, some centers have found new anchors in the form of a gym, bowling alley or even ice-skating rink. And, some are now used for back-office operations like a call center or medical uses such as a clinic or dialysis center.
In recent years, French has seen a number of vacant A&P grocery stores in the Northeast find new life. For example, Bristol Farms, an A&P-anchored center in Bristol, Conn., now houses a 45,000-square-foot Big Lots, while another nearby center, also vacated by A&P, relies on a Michael's to draw traffic.
One of the biggest challenges facing a landlord with a vacant grocery store is trying to preserve the cash flow of the center, but also finding an anchor that will complement it and enhance its value and performance. “If a landlord goes for a non-traditional use, it probably doesn't benefit the center in any particular way, but sometimes non-retail tenants pay a bit more rent,” Carlise says. “If you can't be patient and wait for a retailer, then you have to take some desperate measures.”
New Plan Excel Realty Trust Inc. is one landlord that focuses on bringing on non-traditional anchors to its neighborhood centers. “We're out there trying to highest and best use for our centers,” says Michael Carroll, a vice president of the New York City-based REIT. “Sometimes it's not a grocery store, and sometimes it's not even retail.”
Many landlords contend that a non-traditional anchor simply induces a center's evolution. New Plan Excel, for example, lost a Wal-Mart anchor for a Rocksborough, N.C., center. The REIT filled the space by converting the shell into municipal offices for Brunswick County. “In this case, we see our ancillary retail turning into service-related uses like automotive insurance and title, home mortgage providers and restaurants to serve the employment base,” Carroll notes.
Similarly, New Plan Excel leased a vacant grocery store in Knoxville, Tenn., to First Tennessee Bank. The bank opened a call center in the space. “Where we've done conversions to back-office functions, we merchandise accordingly, for example, bringing in restaurants for the big lunch time business,” says Carroll. “A dry cleaner and liquor stores also work.”
But, landlords often find it difficult to lease small-shop space, or end up not achieving the kind of rents they want with a non-traditional anchor, Carlise says. “A landlord has to balance his income needs with the success of the center as a shopping environment,” he notes.
Density Over Co-Tenancy
The biggest issue when it comes to filling a dark anchor in a neighborhood center is the lack of co-tenancy, according to Terry Brown, president & CEO of Columbia, S.C.-based Edens & Avant. “For a retailer like Staples or TJ Maxx, a neighborhood center usually doesn't offer the kind of co-tenancy they are used to,” he explains. Nonetheless, many retailers are willing to take a chance and set up shop in an empty grocery store space because of local market dynamics.
“A neighborhood center is not a retailer's first choice unless it's in a densely populated area where power center opportunities don't exist,” Carlise says. “A large retailer would be compelled because of demand and availability — they're not going to take a neighborhood center if there's a power center nearby because of the synergy of other retailers.”
French agrees. “It really depends on the location and the demographics,” he says. “If you're in Westchester County in New York, it's so under-retailed you can replace any vacant anchor. A retailer will say ‘I might have wanted to be three miles up the road, but I can't get that, so I'll take this space’.”
New Plan Excel, for example, is negotiating with Staples to fill a shuttered grocery in suburban Philadelphia. “This is a very high-income area, and Staples is looking at the center as a way to tap into the market,” Carroll says, adding that the office supply retailer won't have any of the co-tenancy it typically seeks. “Retailers are demographically driven as much as they as co-tenancy driven,” he contends.
Carroll also claims that there is a shortage of new space, particularly power center space. “But, there is still a lot of retailer demand to open stores, so that shortage is compelling retailers to look at second-generation space,” he says.
AmREIT's Barker concurs: “Anchors get more flexible when there are fewer options.” Unfortunately, she adds, landlords with centers in suburban areas or markets where land is plentiful may find it more challenging to convince a retailer to take a chance on their center.
For example, landlords will likely find it difficult to fill many of the stores that Winn-Dixie plans to close because they are in small markets with few barriers to entry like Raleigh-Durham, N.C. and Savannah, Ga. “Usually a dark grocery store has been re-tenanted because of limited availability and the empty space created an opportunity,” says Barry Fishbach, an executive vice president with Robert K. Futterman & Associates LLC in New York. “In a more suburban market, it's been harder to fill the void by other retailers.”
Performance Anxiety
Historically, most investors shied away from neighborhood centers with non-traditional anchors, but that's not true today. Losing an anchor isn't the kiss of death, Fishbach says. “A neighborhood center with non-traditional anchor can be a performing property,” he says. In fact, in many cases the new anchor adds value either by attracting new tenants or by increasing the property's cash flow through higher rents.
For example, one of Irvine, Calif.-based Faris Lee Investments' neighborhood centers in Yorba Linda, Calif., wasn't performing well. The anchor, Ralph's grocery store, had moved out but was still paying rent. Although the center was located in an affluent area, it didn't get a lot of drive-by traffic, according to Richard Walters, Faris Lee president. “In this case, Ralph's had never performed well,” he notes, adding that once the Ralph's was replaced by a local skating-rink operator, the small-shop tenants started doing better because traffic was heavier.
Today, there's so much capital in the market, the center with a non-traditional anchor still gets a fair amount of investor interest. “Investors are generally looking at the overall merchandise mix and how retailers are doing as a whole,” Carroll says.
And, while it's true that a risk-averse investor would prefer a grocery-anchored center, some investors like owning a center with a non-traditional anchor. “Bristol Farms had a lot of interest because it still had credit tenants,” French says, adding that it traded at a slightly higher cap rate than a grocery-anchored center.
Brown estimates that non-traditional anchored-centers trade for 75 to 100 basis points lower than a grocery-anchored center. And, while a non-traditional anchor might not be as credit-worthy as a national grocery chain, it may still offer credit.
In Houston, for example, Velocity Sports took down two dark Albertson's. The new anchor, which caters to high school and collegiate athletes, not only brought in a host of new small-shop tenants, it also boasted a franchise credit, Barker says.